Either China’s central bank blinked in the face of a painful liquidity crunch and a stock market swoon – or it figured it had made its point.

After a lengthy period of benign neglect, the People’s Bank of China shifted its stance this week, and pumped funds into a nervous and financially strained interbank market, where banks lend to each other for short-term funding.

The credit squeeze had been building since late May – worsening in mid-June – as a result of a number of factors, among them a drop in foreign currency inflows, regulatory requirements at the end of the second quarter and a mismatch between banks’ long-term lending and short-term funding.

That “perfect storm” in the interbank bond market sent the overnight lending rate swinging wildly – reaching a stunning 30% at one point last Thursday before dropping back sharply. Along the way there were rumors that some banks had defaulted on interbank credit contracts. The market talk was never confirmed – nor was it authoritatively denied in most cases.

Over that agonizing period, the central bank maintained radio silence. While its inaction in the interbank money market was certainly a signal of its views, there were many who wanted more.

“The central bank kept silent as all these rumors were flying about,” said one Shenzhen-based trader. “All the market could do was guess.”

Others echoed those sentiments.

“Even after the rate spiked in early June, the intention of the central banks still wasn’t clear to the market because of a lack of clear communications,” wrote Goldman Sachs economist Yu Song.

“In our view, a clear communication of policy intentions as such is highly important to guide market expectations, avoid liquidity hoarding, and contain excessive volatility of the market. …Continued communications on policy intentions and actions will be helpful to further ease market uncertainties, given the extreme volatility in recent weeks,” he added.

The central bank isn’t big on communication in the best of times. It doesn’t hold many press conferences. Ask it for a comment, and the answer is usually “send us a fax.” Quite often, that’s the end of the conversation.

The market was looking for a bit more guidance this time, however.

The People’s Bank of China (PBOC) is fondly known as yangma, or “central mommy,” by interbank bond traders because it usually takes care of its family of banks. But it uncharacteristically signaled its reluctance to come to the rescue this time by not injecting large amounts of funds into the interbank system — even in the face of the steep climb in interbank interest rates.

Its inaction was described analysts as a lesson in liquidity management aimed at the nation’s banks as China gets ready to permit more market-based interest rates, which are still guidelines by the central bank.

“China’s current high interbank rates are the intended result of a PBOC campaign to force banks to better manage liquidity and deleverage from certain sectors,” wrote Standard Chartered economists late last week.

The central bank passed up one opportunity to calm the market when it issued its report on the second quarter monetary policy meeting on Sunday. It offered a little boilerplate about steady credit growth and better liquidity management but chose not to elaborate on this issue.

Agence France-Presse/Getty Images

A man looks on in front of a screen indicating activity at a stock exchange in Huaibei, north China’s Anhui province on June 24, 2013. Chinese shares slumped 5.3% on June 24 as authorities refused to pump fresh money into the financial markets despite a growing cash crunch that is squeezing banks, dealers said.

Then on Monday it came out with a tough statement, effectively telling the market to sort out liquidity problems by itself (in Chinese).

The tough talk was a little too tough for the stock market, which sank more than 5% on Monday. The market was headed for another bruising day on Tuesday, tumbling more than 5% in the morning — and that’s when the alarm bells starting ringing.

By the afternoon, the stock market clearly had heard new marching orders, with prices nearly erasing all of the morning’s losses by the end of trade. And just before the market closed, the new public stance from the central bank became apparent.

“We will continue to closely monitor changes in liquidity in the interbank market,” said Ling Tao, a deputy director of the Shanghai branch of the People’s Bank of China, speaking at a news conference in Shanghai. “And we will step up communication with the market to stabilize expectations and guide market interest rates into a reasonable range.”

Then the central bank weighed in with a policy statement announcing it had in fact extended funds to some better behaved banks though it didn’t say which ones, in what volumes or at what price.

“Just as everything looked really bleak, they brought in the paratroopers to the rescue,” said the Shenzhen trader.

It appears that the central bank didn’t have much choice at that point. The problem that began in the interbank market had already had spilled over to the stock market and that was threatening to unnerve the public at large.

“The central bank had to calm the market,” said Li Daokui, a former adviser to the PBOC. Speaking at a conference in Beijing, he said that ultimately monetary policy alone wasn’t enough to sort out the problems in the banking system.

Mr. Li said that more measures may be on the way. At that point, market rumors might well start flying again. The question will then be: What does “central mommy” have to say?

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